Solving the Productivity Puzzle

Employment is going up while calculated GDP is going down. Calculated GDP divided by employment is called ‘productivity’ in units of GDP per labour hour. ‘Productivity’ is therefore falling. Those who find this puzzling may not have read the small print which admits that official GDP calculations omit a huge part of output simply because it’s hard to measure. The forgotten output has become increasingly important in mature economies: intangible fixed assets. Download ‘Solving the Productivity Puzzle’ (link on right; it’s a short read) to find out why we are richer than we thought …

February 1st, 2013 |

1 comment to Solving the Productivity Puzzle

Many thanks to Izabella Kaminska for publicising ‘Solving the Productivity Puzzle’ on the Financial Times blog (link below). The comment by Prof. Jonathan Haskel was decisive. I left the following reply to some of the other FT comments:

As author of Solving the productivity Puzzle, I’m grateful for the feedback. I suggest reading the whole paper it’s only 1500 words and can be downloaded from http://www.matureeconomy.org.

As far as the basic premise of my paper is concerned, ONS publications agree that many intangible fixed assets (databases, training, etc.) are omitted from their GDP calculation though in theory they should be counted in the Gross Fixed Capital Formation component. This might not be a significant problem if they remained constant and/or did not employ significant numbers in the UK. I argue that they are growing explosively (think ‘big databases’) and creating lots of jobs.

When included, fixed assets are ‘capitalised’ and the capital value is added to the GDP estimate along with the sum of operating surpluses (value added). This is logical because they depressed the value added in that year by being purchased or made for future use by the company which is capitalising them.
a few specific questions raised:
Q1. Why do we see the productivity puzzle in the UK only?
A: According to ONS, it exists in other European countries too but not to our extent. My explanation: UK companies are ahead of the curve and invest more in intangibles. Try interacting with France Telecom’s customer service database. (USA: do not assume their GDP calculation methodology is the same as Europe’s).

Q2. Isn’t software development already counted as business services in GDP accounts?
A. Yes, the value added by a software sales company has already been counted. We’re talking about putting software on the books of the user company as an asset, even when developed in-house.

Q3. Why reject the ‘labour hoarding by zombie companies’ explanation of the ‘productivity puzzle’?
A. If true, the private sector is broken. That could be a very dangerous theory to use. Exceptionally high standard of proof needed.
Link to Financial Times blog: http://ftalphaville.ft.com/?p=1372422